Some mortgage firms gave homeowners “incomplete or inaccurate information” about a federal law designed to prevent a spike in foreclosures, a federal regulatory agency says in a new report.
The findings take a bit of the luster from the federal mortgage forbearance program, which has won rave reviews for staving off defaults during the economic downturn of 2020. When the U.S. economy plunged into a deep recession last year, politicians and the mortgage industry leapt into action.
They dangled generous breaks — known as forbearance — to nearly anyone with a home loan. As a result, several million homeowners were able to hit the pause button on their mortgages, and foreclosures plunged to record lows in 2020. There were 2.7 million homeowners in forbearance as of this week, according to the Mortgage Bankers Association.
As the coronavirus crisis continues, however, there’s new evidence that lenders didn’t perform flawlessly as they rolled out forbearance programs. A newly appointed federal regulator says some mortgage servicers — the companies that collect loan payments — failed to follow the law.
David Uejio took over last month as acting director of the Consumer Financial Protection Bureau (CFPB). Last week, he said some unnamed servicers misinterpreted the lenient guidelines in the Coronavirus Aid, Relief and Economic Security (CARES) Act.
The CARES Act promised borrowers who entered forbearance would pay no penalties. However, Uejio wrote in a statement posted on the CFPB site that some servicers charged and collected late fees for borrowers in forbearance.
In other cases, servicers simply didn’t process borrowers’ requests for forbearance. An appointee of President Joe Biden, Uejio promised that the federal agency will pursue servicers that improperly applied forbearance guidelines.
“Moving forward, the CFPB will take aggressive action to ensure that regulated companies follow the law and meet their obligations to assist consumers during the COVID-19 pandemic,” Uejio wrote.
The agency didn’t indicate how common the problems are, nor did it name names of servicers who misled borrowers. The CFPB acknowledged that mortgage companies faced “significant challenges” as they scrambled to learn about the new forbearance program.
Regulatory experts expect the CFPB to take a more assertive approach under Biden than it did when President Donald Trump was in the White House. “We’re about to see a very sharp shift in tone and approach,” said Michael Gordon, a former CFPB official and now a partner at Bradley, a national law firm.
How forbearance is supposed to work
Under the CARES Act, forbearance is straightforward. Essentially any borrower who wants forbearance can get it.
The pause on payments applies to anyone with a government-backed loan. Borrowers can apply for forbearance and get a 180-day break on payments with no penalties and no late charges. The missed payments are simply added to the end of the loan.
Borrowers can ask for an additional 180 days of forbearance. The CARES Act covers loans held by Fannie Mae or Freddie Mac or issued by the Federal Housing Administration or the U.S. Department of Veterans Affairs.
The CARES Act didn’t address jumbo loans, non-QM loans and other mortgages held by lenders or owned by private investors, but many banks voluntarily offered 180 days of payment relief.
The generous terms of forbearance are a sharp contrast to the mortgage industry’s response to the housing crash and the Great Recession. During that crisis, borrowers struggled to win relief from their loans, and foreclosures soared.
How servicers failed to follow the law
While the CARES Act was straightforward, some servicers misconstrued or misinterpreted the law, the CFPB says. One servicer suggested, inaccurately, that borrowers had to pay a fee to enter forbearance. Another servicer provided incorrect due dates for the borrower’s next payment.
Other examples of poor practices:
- Dragging out the processing of forbearance requests. In some cases, servicers were slow to process requests for forbearance, the CFPB says. This led some borrowers to miss payments and suffer hits to their credit scores.
- Putting borrowers in forbearance without their knowledge. In other cases, they thought they were simply perusing information about forbearance on a servicer’s website, or discussing financial struggles with representatives on the phone. Those borrowers did not understand that they had applied for, or that the servicer would process, a forbearance.
- Errant collection notices. The CARES Act promised borrowers they wouldn’t have to worry about mortgage payments for six months to a year. However, some servicers sent notes informing borrowers in forbearance that their accounts were past due, and that they could face late fees and dings to their credit scores. These notices “may result in confusion for consumers enrolled in CARES Act forbearances,” the CFPB said.
- Misleading statements about lump-sum payments. The CARES Act doesn’t require borrowers to pay a large sum for missed payments after forbearance ends. Instead, the borrower resumes monthly payments. However, the CFPB says, some servicers told borrowers they’d need to make lump sum payments to cover all missed monthly payments when forbearance ended.
How to apply for forbearance
Generous forbearance programs — which give borrowers a break from payments — have helped stave off foreclosures. How the relief works:
- You have to ask. Borrowers must request forbearance. Don’t stop making payments without checking in with your lender or servicer.
- Qualifying is relatively easy. Lenders aren’t demanding proof of hardship.
- There’s no penalty. Missed payments during forbearance won’t hurt your credit score, and you won’t accrue late charges.
- You still owe the money. Forbearance pauses payments by extending the length of your loan. After the grace period ends, you’ll resume making regular payments but the term of your loan will be extended to include the payments you missed.